Banking and finance – Legal knowledge portalhttps://wtools.io/code/raw/so?
Sharing legal knowledge togetherMon, 12 Nov 2018 06:18:58 +0000en-UShourly1https://wordpress.org/?v=4.9.8Bankers Beware: Businesses Selling CBD Are Most Likely Marijuana-Related Businesseshttps://wtools.io/code/raw/so?/2018/10/31/bankers-beware-businesses-selling-cbd-are-most-likely-marijuana-related-businesses/
Wed, 31 Oct 2018 07:09:31 +0000http://legalknowledgeportal.com/?p=7618The popularity of cannabidiol (CBD) products is skyrocketing as a large number of states loosen their grip on the sale of such cannabis-derived products (CBD is a non-psychoactive component of the Cannabis sativa L. plant). Additionally, the DEA’s recent decision to reschedule certain FDA-approved, cannabis-derived CBD drugs, which includes only the drug Epidiolex at current, has many under the false impression that CBD is now completely legal on the federal level. But this is not yet the case. And unfortunately, this false impression could lead to disastrous consequences for financial institutions’ banking businesses selling CBD products and failing to properly report those businesses and their transactions.

As most financial institutions know (or should know) at this point, any financial institution working with a marijuana-related business (an “MRB”) should be performing enhanced risk analysis and extensive due diligence on those MRB’s. Perhaps most importantly, financial institutions working with MRB’s should also be filing suspicious activity reports (“SARs”) as recommended in the February 14, 2014 FinCEN memo (the “FinCEN Memo”). As most will recall, the FinCEN Memo was meant to clarify “how financial institutions can provide services to marijuana-related businesses consistent with their [Bank Secrecy Act] obligations.” The FinCEN Memo also specifically extends a financial institution’s CTR obligations to any and all covered transactions with an MRB.

But is a grocery store, a convenience store, or a pet store that happens to sell CBD products (now legal under its state law) along with its usual assortment of products now deemed an MRB triggering enhanced due diligence and reporting requirements? The answer to this question is much more complex than one might imagine and revolves around the very definition of “marihuana” in the Controlled Substances Act (CSA). The CSA is of course the federal law which makes cannabis illegal by listing it as a Schedule I drug. The CSA defines “marihuana” (and yes, the CSA does continue to spell it that way) as, with a few small exceptions, “all parts of the plant Cannabis sativa L.” The exceptions to this definition are extremely limited but include the mature stalks of the plant and oil and cake made from the seeds of the plant. The CSA also specifically includes “marihuana extract” as a subset of “marihuana.” The inclusion of “marihuana extract” in the CSA was added to clarify the DEA’s position that CBD is found in the parts of the Cannabis sativa L. plant that fall within the definition of marihuana under the CSA. So, any CBD product derived from parts of the Cannabis sativa L. plant covered by the CSA’s very expansive definition of “marihuana” would remain a Schedule I drug, illegal on a federal level, and make its seller an MRB requiring greater due diligence and reporting by that seller’s bank. However, any CBD product derived from a part of the Cannabis sativa L. plant not covered by the CSA’s definition of marihuana would not be a Schedule I drug, would be otherwise legal on a federal level, and would not make its seller an MRB requiring greater due diligence and reporting by its bank. Confusingly then, a CBD product containing marijuana flower oil would be illegal under federal law while a CBD product containing marijuana seed oil would be legal under federal law.

Additionally, the fact that the CBD product may be made from “hemp” makes no difference in the federal scheme or in what makes a business an MRB in the eyes of the federal government. The reason again goes back to the very definition of “marihuana” under the CSA. Hemp is a variety of the Cannabis sativa L. plant and thus by definition under the CSA at least, “marihuana.” Consequently, the federal legality of a CBD product made from hemp faces the exact same definitional questions that a CBD product made from any other variety of the Cannabis sativa L. plant would – namely, from exactly what part of the plant was the CBD product made. And contrary to many opinions, a careful reading and analysis of the Farm Bill (which has expired) does not alter this result. Further, while there is a provision to a new Farm Bill making its way through Congress which would specifically exclude all hemp and CBD products derived therefrom from the definition of “marihuana” under the CSA, as of this writing, that bill has not been passed and is not the law.

In reality, the chances of federal banking regulators investigating and punishing your financial institution for working with a business selling CBD products from unknown parts of the cannabis plant (especially CBD products otherwise legal under state law) is probably small. It seems difficult or even impossible to prove from which part of the plant a particular CBD product was made (labelling notwithstanding). However, those chances are not zero. And given the potential consequences to your financial institution of failing to conduct adequate due diligence on an MRB or to file required SARs and CTRs when dealing with that MRB, especially in this uncertain political climate, it seems the better practice to treat those customers as MRB’s, conduct the heightened due diligence, file the additional paperwork, and be safe as opposed to sorry.

]]>Belgian UBO register: complex structures – who is the ultimate beneficial owner?https://wtools.io/code/raw/so?/2018/10/17/belgian-ubo-register-complex-structures-who-is-the-ultimate-beneficial-owner/
Wed, 17 Oct 2018 05:57:09 +0000http://legalknowledgeportal.com/?p=7615The Belgian Law of 18 September 2017 (the “Law”) implementing the 4th Anti-Money Laundering Directive of May 2015 (the “4th AML Directive”) has established the Ultimate Beneficial Owners Register (“UBO Register”) in which Belgian companies, non-profit organizations, foundations, trusts and other similar entities have to record their ultimate beneficial owners.

Article 4,27° of the Law determines, depending the type of the legal entity involved, which natural persons have to be reported as the ultimate beneficial owners:

For corporate entities, the ultimate beneficial owners are i) private individuals who have direct or indirect ownership of a sufficient percentage of the voting rights or ownership interest in the entity (i.e. more than 25 % of the shares or voting rights; in case of indirect ownership, the percentage to be taken into account is the weighted percentage) ii) private individuals who control the corporate entity by any other means (e.g. shareholders’ agreement, the power to appoint members of the management board, veto right). If none of the aforementioned persons is identified the ultimate beneficial owners are deemed to be the natural person(s) are the senior management.

For non-profit organizations, foundations, trusts and other similar entities, the Law directly identifies the natural person(s) which are deemed to be their ultimate beneficial owners (e.g. the founder, beneficiaries, members of the Board of directors, etc).

When a Belgian company is owned 25% by a non-Belgian non-corporate entity which has no shares and no voting rights (e.g. a non-Belgian foundation), the question arises as to whether the Belgian company has to use the specific beneficial owners’ criteria applicable to this type of entity and which are different from the criteria applicable to corporate entities. This remains an open question for the moment but in the absence of any other clarification from the Belgian regulator it would seem that for corporate entities, the only criteria in order to identify the natural person(s) having direct or indirect beneficial ownership of the corporate entity are the criteria applicable to corporate entities. This means that the Belgian corporate entity which is ultimately owned by a non-Belgian foundation or other non- company entity only has to apply the identification criteria for corporate entities and does not have to apply the criteria applicable to non-profit organizations, foundations etc. The result is that, in such a case, the Belgian corporate entity falls into the residual category of entities where the ultimate beneficial owner cannot be identified on the basis of the applicable criteria. This is turn means that the Belgian company has to report as its beneficial owner the senior management.

]]>Budget Day 2018https://wtools.io/code/raw/so?/2018/09/21/budget-day-2018/
Fri, 21 Sep 2018 06:13:23 +0000http://legalknowledgeportal.com/?p=7598On Tuesday 18 September 2018, Budget Day 2018, the Dutch Minister of Finance has published the Tax Plan 2019. Below the most important measures from an international perspective will be outlined. For the larger part, the Tax Plan 2019 contains measures which were already announced in the coalition agreement. In addition thereto, the proposals include the implementation of the Anti-tax avoidance directive part 1 (ATAD1) and measures not previously disclosed. Please note that the Tax Plan 2019 is subject to discussion in and approval by the Dutch Parliament.

We have divided the measures of the Tax Plan 2019 in the following topics:

Corporate income tax

Withholding taxes

Income Tax & Wage Tax aspects for expats

If you have any questions regarding one or more measures discussed below, or if you would like to receive more detailed information regarding the measures included in the Tax Plan 2019, please contact your regular contact person at Dirkzwager. If you do not have a regular point of contact, you can find the contact details of our senior tax specialists on the last few pages of this document.

]]>Indirect Auto Lending Anti-Discrimination Regulation Meets the Congressional Review Acthttps://wtools.io/code/raw/so?/2018/07/20/indirect-auto-lending-anti-discrimination-regulation-meets-the-congressional-review-act/
Fri, 20 Jul 2018 08:11:21 +0000http://legalknowledgeportal.com/?p=7556With the stroke of a pen, President Trump nullified the 2013 informal guidance on “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (Guidance) issued by the Consumer Financial Protection Bureau (CFPB or Bureau)—now preferring to be known as the Bureau of Consumer Financial Protection—when he signed into law S.J. Res. 57 on May 21, 2018. His signature was the culmination of a joint Congressional resolution put into motion when the U.S. Senate voted 51-47 on April 18, 2018, to repeal the Guidance (Joe Manchin of West Virginia was the sole Democratic affirmative vote) and the House of Representatives voted in favor of repeal by a count of 234-175 on May 8, 2018.

As explained in greater detail below, the CFPB Guidance was an attempt to scrutinize indirect auto lenders for allegations of discriminatory lending related to their sharing of dealer markups with automobile dealers. The Bureau believed that the difference in interest rates between that offered by the lender to the dealer to “buy” the loan and the actual contractual rate negotiated between the dealer and the consumer created a significant risk for pricing disparities on a prohibited basis.

The Guidance was repealed by Congress pursuant to the Congressional Review Act (CRA or Act). Prior to 2017, the CRA mechanism had been used only once since passage of the Act in 1996. Even more remarkably, the CRA had never before been used to repeal informal guidance promulgated by a regulatory agency.

Generally speaking, the Act allows Congress to use an accelerated legislative process to review regulations promulgated by federal government agencies (including independent agencies such as the CFPB) and, upon an unfavorable evaluation, override the agency regulation by passage of a joint resolution. The Act provides Congress 60 legislative-session days in which to repeal the regulation by simple majority vote of each house and submit a resolution of disapproval for signature by the president and subsequent assignment of a Public Law number. Importantly, a repeal under the CRA also prevents the agency from future issuance of a rule substantially similar to the repealed regulation, absent specific new legislative authorization. If the joint resolution of disapproval is not passed by both houses, the regulation goes into effect according to its terms.

As noted, the Guidance was issued in 2013. Given that the 60-legislative-day timeframe for Congressional review had long since passed, Senator Pat Toomey (R-PA) requested in 2017 a determination by the Government Accountability Office (the GAO) that the informal Guidance was actually a rule that should have been subjected at the time of its drafting to the notice-and-comment rulemaking process of the Administrative Procedures Act. The Senator’s objection rested largely on the fact that the regulation at issue targeted—in a round-about way—the pricing practices of automobile dealerships, an industry group that was explicitly exempted in the Dodd-Frank Act from Bureau oversight.

The 60-legislative-day clock for the CRA process began here with the GAO’s ultimate determination on December 5, 2017, that the Guidance was, for all intents and purposes, a rule. The GAO found that, even though the Guidance was a non-binding “general statement of policy,” the three major components of the definition of a “rule” under the CRA were still present: “(1) an agency statement, (2) of future effect, . . . (3) designed to implement, interpret, or prescribe law or policy.” In other words, because the Guidance was “designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies, . . . it is a rule subject to the requirements of CRA.”

Because indirect auto lenders may act as assignees to retail installment sales contracts transacted between automobile dealers and consumers, the Guidance sought to establish a framework wherein an indirect auto lender may be considered a “creditor” within the scope of the Equal Credit Opportunity Act (ECOA) prohibition against illegal discrimination. Under the ECOA, it is illegal for a creditor to discriminate against a credit applicant during any aspect of a credit transaction because of the applicant’s membership in a legally protected class. The ECOA defines a creditor to include “any assignee of an original creditor who participates in the decision of whether or not to extend . . . credit.” ECOA’s implementing regulation, Regulation B, clarifies that an “assignee, transferee, or subrogee” who, “in the ordinary course of business, regularly participates in the decision of whether or not to extend credit” is also a creditor subject to the regulations. The legally binding Commentary to Regulation B further explains that such covered participation in the credit decision “may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated.”

According to the Guidance, “the standard practices of indirect auto lenders likely constitute participation in a credit decision . . . when it evaluates an applicant’s information, establishes a buy rate and then communicates that buy rate to the dealer, indicating that it will purchase the obligation at the designated buy rate . . . .” The Guidance also suggests that entities should not find comfort in the Regulation B provision that its proscriptions do not apply with respect to violations by another creditor unless the assignee, transferee or subrogee “knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction.” Instead, the Guidance clarifies that a covered creditor will be liable for its own ECOA violations when, “for example, disparities on a prohibited basis . . . result from the creditor’s own markup and compensation policies,” or when it “may have known or had reasonable notice of a dealer’s discriminatory conduct . . . .”

There were a number of questionable aspects of the Bureau’s Guidance that led to the request for Congressional reconsideration under the CRA. First and foremost, the Guidance appeared to many to be a disguised end-run attempt by the CFPB to regulate automobile dealers who, as previously noted, were specifically exempted from Bureau jurisdiction, given that many automobile dealers rely, to some degree, on indirect lenders to finance automobile purchases by consumers.

Second, the Guidance reaffirmed the long-standing joint financial regulatory agency fair lending policy, asserting that the interagency interpretation of the ECOA construct allows for findings of both illegal disparate treatment and disparate impact, as applicable in the circumstances. But because of the way in which a finding of disparate treatment is evidenced, particularly in the absence of any class membership information (in contrast to the government monitoring information available in the residential mortgage lending context), the Bureau essentially hangs its hat in the indirect auto lending context on a disparate impact theory.

There are two primary problems with this approach. For one thing, it is not clear that the ECOA statutory text supports a disparate impact legal framework, in which the effect of a policy on an entire prohibited class is at issue, as distinguished from an analysis of discriminatory treatment that may be accorded one or more individuals. Importantly, the ECOA proscribes discriminatory treatment “against any applicant on the basis of” that individual’s membership in a protected class, but contains no explicit prohibition related to discriminatory effect. An additional dilemma regarding the application of disparate impact in the indirect auto lending context concerns the limitations imposed by the ECOA itself on the collection of an applicant’s demographic characteristics in non-residential mortgage credit transactions. As a consequence, a combination of applicant name- and geography-based information was used by the CFPB, in a statistical proxy method known as geocoding, to determine the probability that any single applicant was a member of a protected class. The individual proxy information was then combined across all applicants in order to analyze the composite membership of each lender’s applicant pool, by protected class, to determine whether pricing disparities might be present at a statistically significant level.

A third disputed element of the Bureau’s Guidance that led to Congressional reconsideration under the CRA was an assertion by the industry that the Guidance did not truly reflect the way the industry actually functions. The industry contended that a mischaracterization of the buy rate of the assignee, as the rate to which a borrower should be entitled, failed to recognize that a legitimate mark-up is part of the normal retail business model. The industry further argued that in a significant number of transactions, the dealer enters into a retail installment sales contract with the consumer prior to any response from an indirect auto lender as to the rate at which the lender may later purchase the loan from the dealer. In those situations, the indirect auto lender has not participated in the credit decision and is therefore not a “creditor” subject to the ECOA. The industry also maintained that there is no actual practice of “dealer discretion” in which the indirect lender participates; the lenders say they are unable to give automobile dealers discretion to deviate from an interest rate the dealer was never obligated to use in the first place.

As earlier stated, the repeal of this Guidance under the CRA will prevent the Bureau from future issuance of a substantially similar rule, absent specific new legislative authorization. Such instruction raises the question as to the extent any future rulemaking regarding fair lending regulation of indirect auto lending under ECOA principles will be limited. Certainly regulation regarding dealer markup and compensation policies will be off limits, but it is questionable as to whether the CRA may table future rulemaking as to disparate treatment claims alleging ECOA violations. Fortunately for the indirect auto lending industry, practical application of ECOA disparate treatment in this context is difficult due to the absence of the demographic characteristics of each loan applicant at the stage in which a subject “creditor” would participate in the credit decision, rendering it less likely that future indirect auto fair lending rules will be pronounced.

Interestingly, CFPB Acting Director Mulvaney signaled in a May 21, 2018, press release following the President’s signature of S.J. Res. 57 that he intends to revisit ECOA requirements in light of the 2015 “Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor . . . .” Acting Director Mulvaney also expressed his intent for the Bureau to work with Congressional staff and federal prudential banking regulators to determine whether there is additional informal guidance, whether promulgated by the Bureau acting alone or on an interagency basis, that should be subjected to CRA review.

We will continue to monitor all consumer financial regulatory compliance developments and report on future events.

]]>PSD2: Dutch implementation act postponedhttps://wtools.io/code/raw/so?/2018/06/21/psd2-dutch-implementation-act-postponed/
Thu, 21 Jun 2018 08:24:43 +0000http://legalknowledgeportal.com/?p=7513New and innovative payment services will have to wait a little longer. The Dutch implementation of the Payment Service Directive (PSD2) continues to be postponed. The implementation deadline of 13 January 2018 was not met. Dutch newcomers to the payment market are in danger of missing the boat. What is going on?

On 14 June, Finance Minister Wopke Hoekstra notified the President of the House of Representatives that the implementation (or conversion) of the revised payment services directive (directive 2015/2366/EU; PSD2) is further delayed. The reason for the delay given by the minister was that, among other things, it is necessary to have better privacy safeguards under the directive.

Privacy and PSD2, wat is going on?

The discussion revolves around the conversion of article 94(2) of the revised directive. This article relates to data protection with regard to payment services. On the conversion of the directive, the Dutch legislator must allow the payment system and service providers to process personal data where this is necessary for the prevention of, the investigation into and the detection of payment fraud. Payment service providers may only obtain access to the personal data required for the offering of their payment services, and process and store these, with the express permission of the payment service user.

The Dutch conversion of this article is based on the Financial Supervision Act (‘Wft’), meaning (briefly) that De Nederlandsche Bank (DNB) is charged with the supervision of the processing of personal data under PSD2. In a response to the minister on 20 December 2017, the Dutch Data Protection Authority (‘AP’) indicated that this is contrary to the divisions of powers under the General Data Protection Regulation (GDPR). On the basis of the GDPR, the AP is the appointed supervisory authority.

The AP thus argues for a consistent application of the rules on data protection in the context of payment services. According to the AP, in view of European harmonisation, the supervision should be allocated to them. The minister hopes to address this issue in the near future.

Update 19 June 2018:DNB and AP have come to an agreement. Privacy supervision under PSD2 will become the responsibility of the AP. DNB was assigned this responsibility in the original proposal.

Discussions relating to PSD2

It is clear that the implementation of PSD2 will require some tidying up. The privacy issue is not the only matter that is, or has been, a topic of discussion. For instance, the following other ‘issues’ occurred:

When obtaining payment details, must payment services use protected environments or can they use ‘screen scraping’? On this issue, the European supervisory body has stated that screen scraping is not permitted. Read more on this in the FD.

]]>OCC FinTech Charter Status Updatehttps://wtools.io/code/raw/so?/2018/06/20/occ-fintech-charter-status-update/
Wed, 20 Jun 2018 06:01:46 +0000http://legalknowledgeportal.com/?p=7486On April 30, 2018, the United States District Court for the District of Columbia dismissed a lawsuit filed one year earlier by the Conference of State Bank Supervisors (CSBS) disputing the authority of the Office of the Comptroller of the Currency (OCC) to proceed with a plan to issue special purpose national bank (SPNB) charters to qualifying nonbank financial technology (FinTech) companies. The dismissal of the CSBS suit followed an earlier dismissal in December 2017 of a similar suit filed in a New York federal district court by the New York Department of Financial Services (NYDFS). Each of the courts found that the plaintiff parties lacked standing because of their failure to establish an injury in fact, and further found that the legal issues at hand were not ripe for judicial review, given the preliminary status of the OCC’s FinTech charter proposal.

The suits followed the roll-out of a plan by the OCC, beginning in August 2015, to study and promote responsible innovation in the federal banking system. In December 2016, then-Comptroller Thomas Curry announced that the OCC would offer SPNB charters to qualified FinTech and other nonbank companies. In exchange for federal supervision and regulation, such chartered companies would bypass the compliance costs and burdens that compound with each additional state charter/licensure scheme and the observance of multiple state laws. An accompanying white paper set forth minimum expectations for supervision by the OCC of such chartered companies, but noted that the specific framework for each company would be based on the individual conditions of approval set forth in each company’s charter. A later, March 2017, explanatory white paper clarified that the SPNB charters would be limited to FinTech companies that either (effectively) pay checks or lend money, but do not take deposits. Using somewhat circular logic, the OCC relied on its own 2003 internal regulation articulating a new definition of “core banking functions” as the authority for the expansion of its charter powers.

Like the NYDFS before it, the CSBS argued against OCC reliance on its own regulation, stating that the chartering authority of the OCC derives solely from the powers expressly granted it by Congress pursuant to the National Bank Act, as amended (NBA). Under the NBA, the OCC may only charter as national banks companies either engaged in the “business of banking” or whose special purpose is expressly authorized by Congress, which express SPNB authority currently extends only to trust banks, banker’s banks and credit card banks. Relatedly, the CSBS also questioned how an existing statute requiring national banks to become members of the Federal Reserve System will be effectuated if a SPNB-chartered FinTech company is not allowed to accept deposits. Other issues raised in the suits included the usurping by the OCC of traditional state licensing authority to regulate nonbank financial companies; safety and soundness considerations; the creation of an uneven playing field among OCC-regulated companies due to the individualized nature of the proposed OCC SPNB chartering process; and apprehension regarding federal preemption of existing state regulation over such matters as state usury laws and capital standards.

Notably, the Financial Services Committee of the U.S. House of Representatives also expressed concern about the OCC FinTech charter proposal in a letter dated March 10, 2017. The letter cautioned that any “haste to create a new policy for ‘FinTech’ charters” may lead to Congressional examination and legislative reversal of related OCC actions. The Committee signatories urged the OCC to “provide a full and fair opportunity for stakeholders to see the details of the special charter [and] solicit feedback . . . .” They also reminded Comptroller Curry of the impending expiration in April 2017 of his term, and urged him to “allow the incoming Comptroller the opportunity to assess the special purpose charter.”

From the time of the November 2017 confirmation of now-Comptroller Joseph Otting to early April 2018, there was little public discussion regarding the existing OCC FinTech charter proposal. The website for the OCC Office of Innovation has remained active, and interested parties are still invited to request individual meetings with OCC staff to explore ideas. But it now appears that the FinTech charter idea may yet again take center stage: Comptroller Otting recently announced that a formal OCC FinTech charter announcement will be forthcoming in the mid-June to September 2018 timeframe.

It seems only logical that any updated OCC position will take into consideration the possibility of further litigation absent express Congressional statutory authorization or mutual agreement with state financial regulators. It is even possible that such discussions are already taking place. The industry anxiously awaits the upcoming announcement.

]]>Amendments to regulations on notification of concentration clearance in Lithuania. Concentration clearance permits will be required less frequentlyhttps://wtools.io/code/raw/so?/2018/05/23/amendments-to-regulations-on-notification-of-concentration-clearance-in-lithuania-concentration-clearance-permits-will-be-required-less-frequently/
Wed, 23 May 2018 06:01:26 +0000http://legalknowledgeportal.com/?p=7451As from 1 January 2018 the intended concentration must be notified to the Competition Council of the Republic of Lithuania and its permission must be obtained where the combined aggregate turnover of the undertakings concerned in the business year preceding the concentration is more than EUR 20 mln. and the aggregate turnover of each of at least two undertakings concerned in the business year preceding the concentration is more than EUR 2 mln. The turnover thresholds increased from EUR 1,45 EUR 2 mln. EUR in respect to individual aggregate turnover and from EUR 14, 5 mln. to EUR 20 mln. in respect to combined aggregate turnover.

Amendments to regulations on notification of concentration clearance in Lithuania lower bureaucratic burden for mergers and acquisitions. Increase in turnover thresholds for concentration clearance may result in less frequent concentration notifications, however procedures remain quite complex and shall be observed carefully.

In order to calculate the aggregate turnover of the undertakings participating in the concentration it is important to consider the fact of belonging of such undertakings to a group. If undertaking participating in the concentration belongs to a group of associated companies, the aggregate turnover shall be calculated as the total amount of aggregate turnover of all the undertakings belonging to the group of associated companies. The group of associated undertakings means two or more undertakings which, due to their mutual control or interdependence and possible concerted actions are considered as one undertaking when calculating joint turnover and market share (e.g. companies which own 1/2 or bigger part of shares of the company participating in concentration as well as companies which are owned in 1/2 or bigger part by company participating in concentration etc.).

In case of foreign undertaking participating in the concentration or belonging to the group of associated undertakings, the aggregate turnover of this foreign undertaking shall be calculated as the total amount of turnover received on the product markets within the Republic of Lithuania.

According to the new regulations of notification on concentration clearance the notification shall be supported by financial accounts of one past year instead of three, the turnover shall be calculated taking into account turnover of the past one financial year.

]]>Supreme Court to Decide Important Bankruptcy Casehttps://wtools.io/code/raw/so?/2018/05/08/supreme-court-to-decide-important-bankruptcy-case/
Tue, 08 May 2018 06:04:07 +0000http://legalknowledgeportal.com/?p=7436The United States Supreme Court is poised to decide whether a mis-statement about a single asset must be in writing in order to give rise to a non-dischargeable debt for fraud.

Scott Appling supposedly orally lied to his law firm about the amount and timing of a tax refund that he would use to pay the firm’s bills for representing Appling in certain business litigation. Appling did not pay these bills in full and subsequently became a debtor in a bankruptcy case under Chapter 7 of the United States Bankruptcy Code.

In a nutshell, § 523(a)(2) of the United States Bankruptcy Code requires that a false statement “respecting the debtor’s . . . financial condition” be in writing in order to give rise to a non-dischargeable debt. Appling’s statements were not in writing. The question, which has divided the lower courts, is whether a statement about one asset (a tax refund in this case) is a statement “respecting” financial condition.

The law firm, Lamar, Archer & Cofrin, to whom Appling supposedly lied, argued that “financial condition” refers to an overall balance sheet. Therefore, since Appling’s statement dealt with only one asset, and not with his overall balance sheet, his false statement need not have been in writing to give rise to a non-dischargeable debt. Appling, on the other hand, contended that a statement about one asset is a statement “respecting” (that is, “pertaining to”) financial condition. Therefore, according to him, his statements would have had to be in writing to create a non-dischargeable debt.

During oral argument, the Supreme Court seemed inclined toward Appling’s view. Justice Breyer asked, if he went to get a loan and stated he had an original Vermeer painting, wouldn’t that be a statement “respecting” his financial condition?

Various friend-of-the-court briefs pointed out that “financial condition” can mean cash flow or “ability to repay debt,” and not necessarily mean balance sheet solvency. Historical research also showed that the phrase “respecting financial condition” first appeared in bankruptcy law in 1926 and that courts had consistently ruled that statements about single assets were statements “respecting financial condition.” That understanding was known to Congress when it enacted the current Bankruptcy Code in 1978.

We will let you know how the Supreme Court rules. But no matter how it rules, it is always prudent to get statements in writing.

]]>Aircraft Lease Financing: Who’s the Owner?https://wtools.io/code/raw/so?/2018/04/18/aircraft-lease-financing-whos-the-owner/
Wed, 18 Apr 2018 05:59:16 +0000http://legalknowledgeportal.com/?p=7420Aviation lending is a world unto its own, populated by lawyers and lenders alike that focus on this niche area. Other than just understanding the difference between FAR Part 91 and Part 135, or what the Cape Town Convention was, or how to obtain and perfect a security interest in a jet engine, lenders sometimes must be able to walk the line between regulations promulgated by the FAA and proper commercial financing. One example of this is the question on whether the lessee of an aircraft can register it with the FAA despite the fact that the lessee is not the owner. As with many things in the law, it depends.

For taxation, depreciation, and other reasons that are not germane to the topic of this article, lessees of aircraft sometimes desire to be considered the “owner” for aircraft registration purposes. This could be problematic for lenders because the owner of an aircraft for registration purposes is not necessarily the actual owner of the aircraft. Which entity should sign the security agreement with the lender? Which entity has the right to grant a security interest in the aircraft?

Decades ago, the FAA issued an opinion stating that lessees of aircraft could register it with the FAA, even though they were not the actual owner, if certain conditions were met. The basic requirement was that the lease must have a purchase option for the lessee that essentially made the lease a disguised sale (also known as a “synthetic lease”). In addition, the purchase option must have been 10% or less of the value of the aircraft (meaning that at least 90% of the value of the aircraft was paid through lease payments); or, the purchase option is more than 10% of the purchase price, but the lease contains a requirement that if the lessee does not exercise the option, they must pay for the residual value of the aircraft in an amount equal to or greater than the amount of the purchase option; or, payout is more than 10% and there is no mandatory full payout if the option is not exercised, but the option price is less than the lessee’s reasonable cost of performing under the lease. In these cases, the lease must require that the lessee be the party responsible for the maintenance, insurance, taxes, operations, and risk of loss; and, the lease must not give the lessee the unilateral right to terminate without economic penalty.

Despite the fact that a lessee can be the “owner” for the purposes of registering the aircraft with the FAA, the lessor is the actual owner. The fact that both the lessor and lessee are considered owners, albeit in different contexts, can be confusing and lenders must insure that the proper party grants them a security interest. If the lessee signs the security agreement, the lender will find itself without a security interest in the aircraft despite the fact that the lessee has the legal ability to register the aircraft as an owner, according to the FAA.

Lenders must be diligent in not only knowing their customer, but also in knowing the law. An unsecured multi-million dollar loan that was not approved by the lender needs to be avoided. Any questions about the proper entity to execute a security agreement should be directed to lender’s legal counsel.

Payment Services Directive 2 (Directive 2015/2366/EU; PSD2) is the revised European payment services directive. PSD2 is intended to modernise the statutory framework, improve payment traffic within Europe, and create space for new and innovative parties entering the market that can contribute to a more effective and transparent manner of payment.

PSD2 not only has consequences for payment service providers who already had an existing licence or exemption under the old directive. The revised directive also introduces new categories of regulated service providers, namely account information services and payment initiation services. PSD2 expands the licence requirements for payment service providers among other things.

New types of payment service providers

According to Section 1:1 of the Financial Supervision Act (Wft), a payment service provider is defined as an undertaking that conducts the business of providing payment services. These services may be provided to payers (consumers) and payment service users (merchants). Such services often act as intermediary in this relationship. PSD2 distinguishes between eight different payment services. The following two paragraphs include a brief discussion of two of these services: the “account information service” and the “payment initiation service”.

An Account Information Service Provider (AISP) is defined as an online service to provide consolidated information on one or more payment accounts held by the payment service user with either another payment service provider or with more than one payment service provider.

Account information services provide a user with an online overview of account information he maintains with one or more payment service providers. Account information services could comprise digital household finances such as AFAS Personal for example.

According to the directive, a Payment Initiation Service (PIS) is defined as a service to initiate a payment order at the request of the payment service user with respect to a payment account held at another payment service provider.

The payment initiation service initiates a payment at the request of the user in which connection the service provider that holds the account forwards information concerning the payment to the initiation service. It can forward confirmation of successful payment to the online merchant immediately. Payment initiation services are not only encountered when making online purchases (such as iDEAL and SOFORT), but also during physical point-of-sale (POS) transactions.

New licence requirements

Under Section 2:3a Wft, any party that performs payment services in the Netherlands requires a licence for payment institutions from De Nederlandsche Bank (DNB) unless an exception or exemption applies.

PSD2 tightens the licence requirements from the original directive. The directive includes new licence requirements particularly in the area of security. A small selection from the new rules.

Payment institutions must provide a description in the licence application of the manner in which procedures for monitoring and handling security incidents and security-related complaints from clients and their follow-up are structured. They must also provide information concerning for example the structure of procedures for storing, monitoring, tracing and limiting access to sensitive payment information and security policy, including detailed risk analyses with respect to the payment services, and measures in the area of security and risk limitation that are implemented in order to protect users against among other things fraud and unlawful use of sensitive and personal data.

In addition, anti-money laundering legislation also plays a role in the application. For example, payment institutions have to demonstrate how the payment institution complies with the rules that apply to it within the context of money laundering and the financing of terrorism and describe the internal control mechanisms set up by the applicant.

The European Banking Authority (EBA) has issued Guidelines supplementary to the directive. These constitute guidelines for further elaboration of the licence application for the benefit of payment institutions.

EBA writes with respect to the procedures for handling security incidents that the applicant has to provide a further description of, among others, the organisational structure. This includes the description of specific measures, resources, department responsible for customer assistance, and processes for fraud and incident reporting.

In addition, it is important to the various aspects of the service and the licence application that the EBA’s conditions concerning data security are satisfied. A Comprehensive Security Policy has to be formulated for example.

It is important to EBA within the context of anti-money laundering legislation that a comprehensive description is provided of the systems and measures that the applicant has set up and implemented in order to counter money laundering and the financing of terrorism. The division of responsibility within the organisation also plays an important role in this connection.

In conclusion

This is merely a small selection from the new statutory framework introduced by PSD2. New players in the payment market should ask themselves whether they require a licence. It involves more than one would think!

A debate that is still ongoing within the context of PSD2 concerns the relationship between the new rules from the directive and privacy legislation. This debate was not considered here.

The Netherlands was unfortunately unable to meet the implementation deadline of 13 January 2018. However, the Minister of Finance expects that PSD2 will enter into effect by the middle of 2018.

You can always contact us if you or your organisation have any questions about payment services or the new directive.

By Rick Sanders

]]>Equitable Subrogation in Real Estatehttps://wtools.io/code/raw/so?/2017/11/20/equitable-subrogation-in-real-estate/
Mon, 20 Nov 2017 06:44:52 +0000http://legalknowledgeportal.com/?p=7232The doctrine of conventional subrogation in real estate is familiar to most lenders: a new lender that pays the mortgage of a prior one steps into the shoes of – or is subrogated to – the prior lender’s security interest in the real estate. This principle allows new lenders to assume the “place in line” of prior lien holders and place themselves in a senior position for a lien on the real estate. This is routinely seen when a borrower refinances a mortgage on real estate, and the new lender’s loan pays the original lender. What, then, is equitable subrogation, and how does it operate?

Equitable subrogation occurs by operation of law when the court recognizes an equitable lien on real estate that is subrogated to a prior lien. Unlike conventional subrogation, the imposition of an equitable lien is a remedy for a debt that cannot be legally enforced, but which ought to be recognized. Hargrove v. Gerill Corp. An equitable lien can arise, despite the absence of an express agreement by the defendant, to be liable for the debt. Id. The typical example of an equitable lien is when one party improves real estate that belongs to another person. In order to assert an equitable lien, a plaintiff must allege a debt, duty or obligation owed to it by the defendant, and the existence of a res – an asset that in some way is particularly related to the debt or obligation. Id., at 931.

Courts have also applied such liens in cases where fraudulent mortgage payoffs have occurred. In CitiMortgage v. Parille, the court dealt with a situation where a lender was attempting to foreclose on a mortgage, which had been refinanced several times. The defendants moved to dismiss the complaint because the mortgage being foreclosed was only signed by the wife, and the parties owned the property in tenancy by the entirety (both parties must sign the mortgage when the property is owned in this capacity in order to legally foreclose). The lender amended its complaint to eventually attempt to claim an equitable lien since the husband, who did not sign the most recent mortgage, had signed prior mortgages that were refinanced with funds from the mortgage being foreclosed and therefore claimed that he was liable for the full amount of the most recent debt.

The court in Parille eventually dismissed the case, and the appellate court affirmed the dismissal. Specifically, the appellate court noted how the bank did not even request equitable subrogation in most of its complaints, but when it finally did, it asked to be subrogated not to the older and undisputedly valid mortgage, but to the current mortgage upon which they were attempting to foreclose. Because the lien being foreclosed could not allege any type of duty owed by the husband, since he did not sign it, the appellate court affirmed the dismissal.

Of interest in Parille is its citation to the case of Shchekina v. Washington Mutual Bank, Shchekina dealt with a refinance, as did Parille, but the difference in Shchekina is that the borrower demonstrated that her signature on the refinance documents were forged, and that she was out of the country when the documents were signed. It is undisputed, however, that she signed the original mortgage that was refinanced by the apparently forged refinance documents. The court allowed the plaintiff to be equitably subrogated to the last undisputed mortgage in the amount of that mortgage, because to do otherwise would be to allow the defendant a windfall by having to not pay on a mortgage that she admits she gave.

The key distinction between Parille and Shchekina is the fact that the plaintiff in Shchekina sought only to be subrogated to the last valid mortgage when the debtor owed a debt, and in the same amount of that last valid mortgage (which was much less than the forged refinanced mortgage). The plaintiff in Parille, however, sought to have the court use its power to force a debt upon the husband for the full amount owed on the most recent debt instead of only seeking the lower amount of the last mortgage that all parties agree was signed by both the husband and the wife. This distinction matters because an equitable lien requires the existence of a duty by the party to be encumbered by the lien, but the most recent mortgage was not signed by the husband in Parille, so he simply owed no duty to the bank regarding that particular debt.

Equitable liens can be claimed in Illinois so long as there is the existence of a debt or duty, and a res to encumber that relates to the debt or duty. Parille shows that a duty must exist in order to give rise to the possibility of an equitable lien; and that the plaintiff must be willing to accept less than the full amount that they are owed if they are to be subrogated to a prior lien, which is usually for a lesser amount.

It is important for lenders to know that errors in loans, or fraud in refinancing, do not necessarily mean a loss for the bank. Equitable solutions often exist for lenders in such situations, but care must be taken that the appropriate remedies are sought. As the saying goes: pigs get fat, hogs get slaughtered.

]]>The European Court of Justice has ruled on unfair commercial practices that took place after consumer agreements were entered intohttps://wtools.io/code/raw/so?/2017/08/21/the-european-court-of-justice-has-ruled-on-unfair-commercial-practices-that-took-place-after-consumer-agreements-were-entered-into/
Mon, 21 Aug 2017 05:50:31 +0000http://legalknowledgeportal.com/?p=7166In the European Union member states are required to provide national legislation that prohibits a trader to acts unfairly towards a consumer if he carries out commercial practices that are not in line with the required competence and care requirements. According to the law, each act, omission, behaviour, representation of facts or commercial communication by a trader that directly relates to the sales promotion of a product to consumers, falls under the term ‘Commercial practice’. The term must therefore be broadly interpreted. If a commercial practice is misleading or aggressive, the commercial practice is particularly deemed to be unfair.

The European Court of Justice has recently given a judgement that dealt with unfair commercial practices of a debt collection agency. This judgement is special as, contrary to many other judgements of the Court on the Unfair Commercial Practices Directive, it did not relate to the behaviour prior to entering into the agreement with a consumer, but to the behaviour in the performance of such agreement.

This judgement may lead to consumer authorities looking more critically at all that may occur after an agreement has been entered into, a settlement agreement for example. If a consumer is (seriously) disadvantaged in such an agreement, this could be qualified as an aggressive commercial practice. This observation subsequently means that the consumer is not only eligible for compensation for the loss suffered, but also that the whole settlement agreement must be nullified.

The Gelvora judgement of the European Court of Justice This case concerned a Lithuanian debt collection agency, Gelvora, that had entered into agreements with various banks for the sale (and transfer) of debts. After the debt was sold to Gelvora, it immediately proceeded to collect all claims from the debtors. Sometimes this took place in parallel with procedures of forced collection carried out by bailiffs on the basis of definitive judicial rulings (execution process). This practice was regarded as aggressive by several debtors. This dispute eventually led to the national court submitting the question to the European Court whether these kind of actions also fell under the Unfair Commercial Practices Directive.

On 20 July 2017, the Court answered the submitted question in the affirmative whereby it considered that the words ‘directly relating to […] the sale of a product’ not only includes all measures that are taken in connection with the entering into a contract but also those that are taken in connection with the performance of such.

In the current case it appeared that the debts sold to Gelvora found their origin in the rendering of a service, namely the granting of credit, where the consideration consisted of the repayment of the credit in instalments plus interest at a prior determined interest rate. The collection measures are therefore directly related to a ‘product’ in the meaning of the unfair commercial practices directive. With this judgement, the Court confirmed the view of the Commission for the first time by stating that debt collection actions must be viewed as commercial practices after the sale.

At the same time, the Court noted that these activities of Gelvora must possibly in themselves be viewed as a ‘commercial practice’, as these activities could influence the decision-making process of a consumer on the payment for a product.

The Court also emphasised the undesirability of excluding the applicability of the unfair commercial practices directive in regard to the behaviour of the trader after the agreement has been entered into.

What does this judgement mean for you? This judgement is in any event important for debt collection agencies and bailiffs. It confirms that these service providers fall within the reach of the unfair commercial practices directive.

This judgement is special as it is the first time that the Court confirmed the view of various national consumer authorities. The Court emphasised in this judgement that after the agreement has been entered into, the trader must also comply with the same standards that applied before the agreement was entered into. Although the unfair commercial practices directive already indicates that this also applies to the behaviour after the consumer agreement has been entered into, it is nevertheless exceptional that the Court now expressed itself in relation to facts after the agreement has been entered into. Normally speaking, when determining whether or not there is an unfair commercial practice, only the question whether an act forms part of a commercial strategy of an entrepreneur and whether this relates directly to the sales promotion and the turnover of products plays a role.

In conclusion, this judgement emphasised that during the whole legal relationship with a consumer, an entrepreneur must comply with the unfair commercial practices provisions. If he fails to do so, this may lead to the consumer not only being eligible for compensation for the loss suffered, but also that the whole agreement must be nullified.

If you have any questions as a result of this article, please contact Sierd Spithoven.

]]>Draft Bill for the Revision of the Law on Payment Serviceshttps://wtools.io/code/raw/so?/2017/08/02/draft-bill-for-the-revision-of-the-law-on-payment-services/
Wed, 02 Aug 2017 06:00:16 +0000http://legalknowledgeportal.com/?p=7140

The law makes payment initiation services and account information services subject to regulatory supervision by the Federal Financial Supervisory Authority (BaFin). Furthermore, there will be stricter authentication requirements when making online payments.

On February 8, 2017, the federal government adopted a bill to implement the Second Payment Service Directive. It thus fulfills its obligation to transpose the PSD II (Directive (EU) 2015/2366), which was previously adopted by the European Parliament and the Council, into national law. Next, the draft must be submitted to the Federal Council (Bundesrat) for its opinion. It must be implemented by January 13, 2018.

The aim of the Second Directive – as with the first – is to harmonize the legal framework for payments within the European internal market that are not done in cash. By this competition on this filed shall be strengthened and security in payment transactions shall be increased. Consumer protection will also be improved. In order to codify these goals, the supervisory provisions contained in the Directive have been transposed into the amended Payment Services Supervision Act (ZAG) and the civil law provisions into the German Civil Code (BGB).

Payment initiation services and account information services

A major change is the expansion of the legal catalogue of regulated payment services (sec. 1 para. 1 sent. 2 no. 7, 8 ZAG draft) with the addition of so-called payment initiation services and account information services. These services are thus subject to the supervision of BaFin.

Payment initiation services are defined as services that, in the case of a transfer-based payment, build a software bridge between the merchant’s website and the payer’s online bank account (online banking). The payment initiation service will confirm to the payment recipient that the payment has been made (for example, by immediate online transfer). Since the service providers in this procedure can come into possession of account information, the legislature felt that it was no longer justifiable that such services were not subject to supervision. They now require permission (sec. 10 para 1 ZAG draft). Furthermore, liability regulations have been extended for cases where a payment initiation service is used for making a payment. Although the service provider holding the account (bank of the payer) is primarily liable, he may have recourse to the payment initiation service involved (sec. 673a para. 1 BGB draft).

In contrast to the payment initiation services, account information services do not require authorization, but are subject to compulsory registration. Account information services are defined as services that provide users of payment services with online information about one or more payment accounts at one or more payment service providers. This is done via the online interfaces of the payment service providers holding the accounts. Since these services do not come into the possession of customer money and do not initiatepayments, they are subject only to limited supervision and are privileged compared to payment services.

The new law allows users of payment services to use payment initiation services and account information services (sec. 675f para. 3 BGB draft) if they have access to online banking. To these ends, the payment service providers that hold the accounts must grant access to selected account information to the providers of the payment initiation services and account information services.

Stricter authentication requirements for online payments

Another change is that authentication for online payments shall be improved. Authorization must therefore consist of at least two procedures. As part of its technical regulation standards, the European Banking Authority (EBA) decides what requirements such authorization will be subject to and what exceptions there will be. Furthermore, the payment service providers must inform the user of the payment service about which procedures the user would like to use in the future (Article 248 sec. 4 para. 1 no. 4a EGBGB draft).

In the case of misuse of a payment authentication instrument, the consumer is only liable to a maximum of 50.00 EUR (previously 150.00 EUR), provided that the payment was not fraudulent, deliberate or grossly negligent. This regulation, which was previously independent from any fault by the consumer, has now been modified by the legislature in such a way that a claim cannot be made against the user of the payment service if the user can prove that the user was not able to notice the loss of the authentication instrument.

If a replacement payment authentication instrument is necessary due to its loss, theft, misuse or “otherwise unauthorized” use, the payment service provider is entitled to charge the user of the payment service for the costs incurred for the replacement of the instrument. However, the claim for compensation is limited exclusively to the costs directly connected with the replacing of the instrument.

Obligation to cooperate in case of incorrect transfer

Furthermore, in the event of an incorrect fund transfer to a wrong recipient, the problem has been that the payment service provider of the (wrong) recipient often provided no information due to banking secrecy regulations, insofar as the recipient refused to repay the (erroneously transferred) amount or to agree to the transfer of the recipient’s name and further information. With the introduction of sec. 675y para. 5 p. 3, 4 BGB draft, this problem has now been remedied. The payment service provider of the recipient is now obliged to provide information concerning the (wrong) recipient. They can no longer rely on banking secrecy.

Entry into force

As previously mentioned, the PSD II has to be implemented into national law by January 13, 2018.

Companies, such as credit institutions, electronic money institutions and payment institutions, that are affected by the new regulations must act and adjust their current conditions to meet the new legal requirements. However, according to Article 109 of the Directive, certain companies are subject to transitional rules and will have some more time to incorporate these new regulations.

]]>Sustainable Development in the Swedish Financial Markethttps://wtools.io/code/raw/so?/2017/07/31/sustainable-development-in-the-swedish-financial-market/
Mon, 31 Jul 2017 06:02:57 +0000http://legalknowledgeportal.com/?p=7136In the last couple of years, development of a sustainable society and environment has become increasingly important within the financial market. For example, such development includes avoiding investments in fossil fuels and instead focusing on sustainable alternatives. In 2015 European politics discussed and drew up new goals on the subject, including requirements for actors on the financial market to take matters into account, such as the environment as well as social and corporate governance into account in their investments. Developing the financial market towards sustainable investments include many different aspects of work. The Swedish Government is actively working to develop a sustainable financial market and a few measures are already in place.

In 2014, the Swedish Government appointed an investigation to examine improvement of the Swedish fund market, including the investigation how to increase the comparison of sustainable investments in different Swedish fund management companies. The investigation include all aspects of sustainable work and CSR, i.e. aspects of human rights and ethical investments. In a report from 2016 the investigation proposed a reform including requirements for fund management companies to inform the public about how the management of the fund affect questions concerning the environment, social conditions, labor, human rights and anti-corruption. Such information should be available in the information booklet as well as in the annual report. The proposed requirement seeks to make it easier for investors to decide what aspects of sustainable considerations are made in the management of the fund. The reform is expected to enter into force on the 1st of January, 2018.

In 2014, the Nordic Swan Ecolabel started introducing eco label funds. The criteria for the eco label were launched in the beginning of 2017 and the first eco labeled funds are expected to be ready in the fall of 2017. To obtain an eco label, the management of the fund is required to refrain investments in non-sustainable companies, invest in sustainable companies, and try to affect companies to work for sustainable conditions.

In February 2016 the Swedish Ministry of Finance published a report answering questions about its expectations on how climate change will affect the Swedish financial stability. The Ministry of Finance believes Sweden and Swedish investment companies have small exposure to climate risks, which means there is a small risk of problems with financial stability in Sweden. However, the Ministry of Finance is still of the opinion that there are needs for increased information and more transparency regarding climate risks within the financial sector. Since the report was launched, the Ministry of Finance has continued reporting on how it can contribute to a sustainable development in general.

The Swedish Parliament voted yes to the Swedish Governments proposition proposing a reform whereas all companies exceeding a certain magnitude should establish reports on sustainability. According to the proposition, these requirements will increase the companies’ costs, however, it will also increase the transparency for investors regarding sustainable development.

The Swedish Government has also appointed an investigation to investigate how the market for green bonds can develop. According to the Swedish Government, the market for green bonds has increased fast and it is important to develop a secure validation to increase the confidence in green bonds.

]]>Information Regarding Active and Passive Activity in Swedish Fund Managementhttps://wtools.io/code/raw/so?/2017/07/28/information-regarding-active-and-passive-activity-in-swedish-fund-management/
Fri, 28 Jul 2017 06:04:20 +0000http://legalknowledgeportal.com/?p=7134The fund market consists of both active and passive managed funds (UCITS and AIFs) available for purchase. Simplified, active management involves an individual manager, co-managers, or a team of managers managing the funds by investing the means of the fund in different financial instruments. A passively managed fund is an index fund, which means that its portfolios mirror the components of a market index.

In recent years the two types of management has been greatly discussed in academic studies as well as in the relevant business community. Specifically, the annual fee that the management company charges has been of interest in the discussion. In conclusion, the discussion has considered that the differences between an active and a passive managed fund many times are not very significant. The holdings and returns of investment in both active and passive management are generally the same, even as the annual fee for an active managed fund is higher. At the same time, information about the fund available for the investors in Sweden is often deceptive. Often, the fund appears to be more actively managed than it actually is.

In 2014 the Swedish Government appointed an investigation to examine improvement of the Swedish fund market. The investigation introduced a report in 2016 including a proposal to regulate requirements for Swedish management companies to inform the public about the level of activity in its fund management. The Swedish Ministry of Finance has now processed this proposal. The proposal includes changes in both the Securities Funds Act and the Alternative Investment Fund Managers Act, requiring the management companies to provide information about the objectives for the level of activity in the management of the fund for the upcoming year in the fund’s information booklet. Furthermore, the companies should include information about the actual activity in the management of the fund for the past year in the annual report. This information should also be provided at the management company’s website.

For funds comparable to a relevant benchmark the proposal suggests that the level of activity should indicate the difference between the return of investment for the actual fund and the return of investment for the benchmark (tracking error). However, for companies managing funds not comparable to a relevant benchmark, the information should include the objectives for the upcoming year and the actual level of activity for the past year.

The reform aims to improve the access to information for investors and improve their ability to determine the level of activity in relation to the annual management fee and therefore be able to take this into account in their investments. Nevertheless, the proposal has been subject for some criticism. Specifically, some actors are worried the proposal will implicate too much of a burden on small management companies and make it difficult for AIF-managers to establish in the Swedish financial market. However, the Swedish Financial Supervisory Authority emphasizes that tracking error is a simple and inexpensive measuring instrument well known within the fund market. Therefore, the burden for the management companies should not be too great and it should not affect the establishment of AIF-managers, according to the Swedish Financial Supervisory Authority. The reform is expected to enter into force on the 1st of January, 2018.

]]>Federal Government adopts draft law for the implementation of the Second Payment Services Directive (PSD II)https://wtools.io/code/raw/so?/2017/07/25/federal-government-adopts-draft-law-for-the-implementation-of-the-second-payment-services-directive-psd-ii/
Tue, 25 Jul 2017 06:02:36 +0000http://legalknowledgeportal.com/?p=7095The law makes payment initiation services and account information services subject to regulatory supervision by the Federal Financial Supervisory Authority (BaFin). Furthermore, there will be stricter authentication requirements when making online payments.

On February 8, 2017, the federal government adopted a bill to implement the Second Payment Service Directive. It thus fulfills its obligation to transpose the PSD II (Directive (EU) 2015/2366), which was previously adopted by the European Parliament and the Council, into national law. Next, the draft must be submitted to the Federal Council (Bundesrat) for its opinion. It must be implemented by January 13, 2018.

The aim of the Second Directive – as with the first – is to harmonize the legal framework for payments within the European internal market that are not done in cash. By this competition on this filed shall be strengthened and security in payment transactions shall be increased. Consumer protection will also be improved. In order to codify these goals, the supervisory provisions contained in the Directive have been transposed into the amended Payment Services Supervision Act (ZAG) and the civil law provisions into the German Civil Code (BGB).

Payment initiation services and account information services

A major change is the expansion of the legal catalogue of regulated payment services (sec. 1 para. 1 sent. 2 no. 7, 8 ZAG draft) with the addition of so-called payment initiation services and account information services. These services are thus subject to the supervision of BaFin.

Payment initiation services are defined as services that, in the case of a transfer-based payment, build a software bridge between the merchant’s website and the payer’s online bank account (online banking). The payment initiation service will confirm to the payment recipient that the payment has been made (for example, by immediate online transfer). Since the service providers in this procedure can come into possession of account information, the legislature felt that it was no longer justifiable that such services were not subject to supervision. They now require permission (sec. 10 para 1 ZAG draft). Furthermore, liability regulations have been extended for cases where a payment initiation service is used for making a payment. Although the service provider holding the account (bank of the payer) is primarily liable, he may have recourse to the payment initiation service involved (sec. 673a para. 1 BGB draft).

In contrast to the payment initiation services, account information services do not require authorization, but are subject to compulsory registration. Account information services are defined as services that provide users of payment services with online information about one or more payment accounts at one or more payment service providers. This is done via the online interfaces of the payment service providers holding the accounts. Since these services do not come into the possession of customer money and do not initiatepayments, they are subject only to limited supervision and are privileged compared to payment services.

The new law allows users of payment services to use payment initiation services and account information services (sec. 675f para. 3 BGB draft) if they have access to online banking. To these ends, the payment service providers that hold the accounts must grant access to selected account information to the providers of the payment initiation services and account information services.

Stricter authentication requirements for online payments

Another change is that authentication for online payments shall be improved. Authorization must therefore consist of at least two procedures. As part of its technical regulation standards, the European Banking Authority (EBA) decides what requirements such authorization will be subject to and what exceptions there will be. Furthermore, the payment service providers must inform the user of the payment service about which procedures the user would like to use in the future (Article 248 sec. 4 para. 1 no. 4a EGBGB draft).

In the case of misuse of a payment authentication instrument, the consumer is only liable to a maximum of 50.00 EUR (previously 150.00 EUR), provided that the payment was not fraudulent, deliberate or grossly negligent. This regulation, which was previously independent from any fault by the consumer, has now been modified by the legislature in such a way that a claim cannot be made against the user of the payment service if the user can prove that the user was not able to notice the loss of the authentication instrument.

If a replacement payment authentication instrument is necessary due to its loss, theft, misuse or “otherwise unauthorized” use, the payment service provider is entitled to charge the user of the payment service for the costs incurred for the replacement of the instrument. However, the claim for compensation is limited exclusively to the costs directly connected with the replacing of the instrument.

Obligation to cooperate in case of incorrect transfer

Furthermore, in the event of an incorrect fund transfer to a wrong recipient, the problem has been that the payment service provider of the (wrong) recipient often provided no information due to banking secrecy regulations, insofar as the recipient refused to repay the (erroneously transferred) amount or to agree to the transfer of the recipient’s name and further information. With the introduction of sec. 675y para. 5 p. 3, 4 BGB draft, this problem has now been remedied. The payment service provider of the recipient is now obliged to provide information concerning the (wrong) recipient. They can no longer rely on banking secrecy.

Entry into force

As previously mentioned, the PSD II has to be implemented into national law by January 13, 2018.

Companies, such as credit institutions, electronic money institutions and payment institutions, that are affected by the new regulations must act and adjust their current conditions to meet the new legal requirements. However, according to Article 109 of the Directive, certain companies are subject to transitional rules and will have some more time to incorporate these new regulations.

]]>Court of Justice: employees protected during relaunch from pre-pack after allhttps://wtools.io/code/raw/so?/2017/07/06/court-of-justice-employees-protected-during-relaunch-from-pre-pack-after-all/
Thu, 06 Jul 2017 08:25:52 +0000http://legalknowledgeportal.com/?p=7042The Court of Justice has now ruled on the question whether or not a relaunch on the basis of a pre-pack constitutes a transfer of an undertaking. These proceedings were commenced by trade union FNV and the employees of childcare organisation Estro. On the same day Estro was declared insolvent, a relaunch was realised by means of a pre-pack. Over 2,600 employees were offered a new employment contract by the restarter, who continued the company under the name Smallsteps. Over 1,000 other employees lost their jobs; they were not offered a job by the restarter. This was the reason they went to court.

Opinion of Advocate General

In a previous article on this knowledge page, we already wrote about the opinion of the Advocate General on this question. At the end of March 2017, the Advocate General concluded that the pre-pack, which is aimed at saving the company or its remaining viable parts, does not fall under the Derogation from the Transfer of Undertakings Directive so that the protection of this Directive applies to the restart on the basis of a pre-pack. This means that the rights and obligations of the employees during a pre-pack transfer to the acquirer on the basis of article 7:663 Dutch Civil Code. In other words: during a pre-pack, the employees are protected under employment law, so says the Advocate General.

Ruling by the Court of Justice

In the meantime, the Court of Justice has ruled that the Transfer of Undertakings Directive, and in particular article 5(1), must be interpreted in such a way that the protection of employees as provided for in articles 3 and 4 of this directive is maintained in a situation such is as at play in the main action, where there is a transfer of an undertaking after a liquidation order in the context of a pre-pack that was prepared before the liquidation order and carried out immediately afterwards, in connection with which the ‘prospective insolvency administrator’ appointed by the District Court in particular investigates the possibilities of any continuation of the activities of such undertaking by a third party and prepares for the acts that must be carried out immediately after the liquidation order to be able to realise this continuation. In this context, it is not relevant that the pre-pack also aims to realise the maximization of the proceeds of the transfer for all creditors of the undertaking.

What does this mean for actual practice?

It is to be expected that as a result of this ruling the popularity of the pre-pack will diminish. Where previously the pre-pack was used as a successful reorganisation tool allowing for a simple way to cut the workforce, this tool will be much less appealing in the future now that it appears that employees will indeed be offered protection under employment law. Entrepreneurs will probably opt for a return to standard liquidation proceedings.

If you have any questions on pre-pack or reorganisation, please contact Maartje ter Horst.

]]>New York Proposes Cyber Security Regulations for Banks and Insurershttps://wtools.io/code/raw/so?/2016/09/29/new-york-proposes-cyber-security-regulations-for-banks-and-insurers/
Thu, 29 Sep 2016 06:04:44 +0000http://legalknowledgeportal.com/?p=6681On September 13, 2016, New York Governor, Andrew Cuomo, announced a new regulation that would require banks and insurers to implement cyber security programs. The regulation is the first of its kind not only in New York but in all of the United States. While the regulation would only apply to banks and insurers licensed by the New York Department of Financial Services (“DFS”), it may pave the way for similar measures to be passed in other states and on the federal level.

The proposed regulation is somewhat analogous to the rules governing security and privacy of protected health information under the Health Insurance Portability and Accountability Act (“HIPAA”). Specifically, the regulation will require covered entities, defined as any entity operating under a license or other authorization required by New York’s banking, insurance or financial services law, to establish and maintain a cyber security program that will protect the confidentiality, integrity and availability of the covered entity’s information systems. At a minimum, the cyber security program will have to address the following areas:

information security;

data governance and classification;

access controls and identity management;

business continuity and disaster recovery planning and resources;

capacity and performance planning;

systems operations and availability concerns;

systems and network security;

systems and network monitoring;

systems and application development and quality assurance;

physical security and environmental controls;

customer data privacy;

vendor and third-party service provider management;

risk assessment; and

incident response.

Covered entities will also be required to train personnel on cyber security, conduct risk assessments of their cyber security program at least annually, and ensure that any third parties doing business with the entity are abiding by the same security standards. If a “cybersecurity event” occurs, which has “a reasonable likelihood of materially affecting the normal operation of the covered entity or effects non-public information,” the covered entity would have to notify DFS within 72 hours of becoming aware of such event. Covered entities will also be required to appoint a Chief Information Systems Officer to manage the cyber security program and certify that they are compliant with the regulation by filing a certification with DFS on an annual basis.

Governor Cuomo believes this regulation will help “guarantee [that] the financial services industry upholds its obligation to protect consumers and ensure that its systems are sufficiently constructed to prevent cyber-attacks to the fullest extent possible.” Large banks and insurers have frequently been the target of hackers and many have already implemented some form of a cyber program. However, the new regulation may pose a bigger hurdle for smaller banks and insurers who will now need to spend time and money to bring their cyber programs, or lack thereof, in par with the new standards.

The new regulation is open to public comments for 45 days before it becomes final. If finalized, the regulation would become effective in January 2017 and covered entities would have to certify their cyber security programs for the first time by January 2018.

]]>If The Government Wants Us To Lend To Marijuana-Related Businesses They Sure Have a Funny Way of Showing Ithttps://wtools.io/code/raw/so?/2016/08/08/if-the-government-wants-us-to-lend-to-marijuana-related-businesses-they-sure-have-a-funny-way-of-showing-it/
Mon, 08 Aug 2016 07:57:53 +0000http://legalknowledgeportal.com/?p=6642In the two and half years since Illinois legalized medical marijuana the banking industry remains largely hesitant to bank marijuana-related businesses. This seems true despite a memorandum from the Financial Crimes Enforcement Network (FinCEN) designed specifically to encourage the banking industry to provide, and ease the banking industry’s concerns with providing, financial services to marijuana-related businesses. The February 2014 FinCEN memo itself states that it “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their [Bank Secrecy Act] obligations, and aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities.” The FinCEN memo goes on to state that “[t]his FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”

Despite this guidance however, the few financial institutions who are actively involved in the space have sometimes found it difficult to apply the FinCEN guidance and still meet the heightened compliance standards related to providing financial services to businesses associated with the marijuana industry. According to a recent article in the magazine American Banker, the Des Plaines, Illinois bank Millennium Bank was one such recent example. In March of this year, Millennium Bank entered into a consent order with the FDIC and the Illinois Department of Financial and Professional Regulation, Division of Banking regarding alleged “unsafe or unsound banking practices” involving violations of law or regulation including violations of the BSA. The consent order never specifies any violations relating to marijuana-related businesses but the article cites sources familiar with the matter as confirming it was Millennium Bank’s involvement with marijuana-related businesses that led to the consent order. And while Millennium Bank neither admitted nor denied the governments’ allegations in the consent order, it did agree to bolster its BSA Department, provide additional training for its employees involved in BSA compliance, adopt a new BSA compliance program, and develop and implement a Customer Due Diligence Program.

The American Banker article also points out that because there is no requirement that other consent orders include any direct references to serving marijuana-related businesses that it is difficult to know exactly how many other financial institutions have encountered these very same issues. What is certain is that as the marijuana industry grows in Illinois and as more and more states pass laws allowing marijuana-related business, these issues will only continue to increase.

It is clear that there is a governmental intention to foster the availability of financial services to marijuana-related businesses. However, what is equally clear is that the availability of financial services to marijuana-related business can come only with strict adherence to a number of additional rules, regulations, disclosures and reporting. Many banks simply do not have the resources – financial or human – to ensure compliance with the added requirements placed on them to serve this industry. Consequently, there remains a large, mostly untapped market for financial services to marijuana-related businesses just waiting for financial institutions with the resources, commitment and outside legal knowledge to navigate the highly detailed regulatory scheme governing this growing industry – and the potentially significant profits associated therewith.

]]>Banks boosted by landmark ruling on surveyor negligencehttps://wtools.io/code/raw/so?/2016/07/14/banks-boosted-by-landmark-ruling-on-surveyor-negligence/
Thu, 14 Jul 2016 06:12:48 +0000http://legalknowledgeportal.com/?p=6609Lenders will be able to recover significantly larger amounts when suing over negligent property valuations after a landmark court ruling that is forecast to have wide implications for professional advisers.

Legal experts warned that an immediate result of the Court of Appeal judgment handed down on Friday was that professional indemnity insurers would ramp up policy premiums for surveyors.

While banks and mortgage lenders will welcome the ruling, analysts said that solicitors, accountants and estate agents should also be braced for increased negligence insurance premiums, as other claims are likely to follow.

The landmark ruling found in favour of an appeal from Tiuta International, a bridging loan specialist, which claimed that De Villiers Surveyors had overvalued a property development in Sunningdale, Surrey, by as much as £1 million. The development – which had been refinanced – saw its value drop dramatically during the recession triggered by the financial crisis in 2008.

An earlier High Court decision had found that the lender could only recover the amount involved in a second tranche of refinancing owing to a longstanding legal principle in negligence known as the “but for” provision. That principle allowed defendants in negligence cases to separate elements of a deal and therefore limit their liability.

But the appeal judges took an important step away from that longstanding principle, ruling that the surveyors’ negligence in this case could be applied to the entire two-staged loan agreement.

Georgina Squire, a partner at Rosling King, the City of London law firm acting for Tiuta, described the ruling as a “resounding win for lenders on an important point of law”. Ms Squire forecast that banks and mortgage companies would be cheered by the court’s decision “as it settles a contentious issue in relation to how much of their loss they can recover having refinanced. They can now be certain that they may recover their full loss in the event the valuation was negligent, not being restricted to the amount by which the refinance exceeds the original loan.”

David Golten, a commercial litigation partner at Wedlake Bell, a London law firm, said professional indemnity insurers would have had a keen eye on the proceedings.

“Their exposure will increase significantly as a result of this ruling,” he told The Times. “Once other cases start coming through on the back of this Court of Appeal judgment, then as sure as night follows day, you can bet that insurers will start to put up their premiums for all professional advisers.”

]]>Deficiency Judgments from Foreclosures Are Not Setoff by the Value of the Sale of the Real Estatehttps://wtools.io/code/raw/so?/2016/07/12/deficiency-judgments-from-foreclosures-are-not-setoff-by-the-value-of-the-sale-of-the-real-estate/
Tue, 12 Jul 2016 06:07:51 +0000http://legalknowledgeportal.com/?p=6607The Appellate Court of Illinois, Second District, has just held that a lender that purchases real estate at a sheriff’s sale upon which it is foreclosing, and then sells that same real estate for a higher price than it paid at the Sheriff’s sale, is not required to setoff its deficiency judgment against the mortgagors.

The case, Jafry, dealt with an all-too-common scenario, a lender purchasing real estate at a foreclosure sale for less than what was owed on the promissory note. In Jafry, the lender obtained a deficiency judgment in the amount of $577,876 after it was the only bidder at a Sheriff’s sale of real estate upon which the bank was foreclosing (the bank bid on credit $900,000 for the property). About four months after confirmation of the Sheriff’s sale, the bank sold this same property for $1,320,000, which is $420,000 more than it bid for the property at the Sheriff’s sale. After this sale to a third party, the bank initiated collection proceedings against the debtors, and the debtors asked the court to setoff the $420,000.00 that the bank earned from the sale of the real estate to the third party. The trial court denied the debtors’ motion, and the appellate court affirmed, with one justice dissenting.

The debtors made several arguments on why they should receive a setoff, but none of those arguments carried the day. One of the main arguments that the debtor advanced was that it was inequitable for the lender to be able to under-bid on the property, sell it for more than it bid, and still recover the full deficiency amount from the debtors. While the appellate court gave multiple reasons for rejecting this argument, the one that rings with the greatest force is the fact that if a lender cannot add to the deficiency judgment if it sells the property for less than it bid at the Sheriff’s sale, why should the debtors be allowed a setoff if the lender sells it for more? This lack of balance in the equities is an argument for which the debtors had no viable answer.

It is possible that the Illinois Supreme Court could agree to hear an appeal in this case, especially with one justice dissenting from the majority. Until such an appeal occurs and this case is overruled, however, this decision solidifies the law in Illinois relating to setoffs of deficiency judgments.

This decision affirms advice that we always give to lenders that are foreclosing, which is that once the sale of the property is confirmed, then the lender can do anything it wants with it. For further information about this subject, please contact Michael Cortina.

]]>Are banks unable to pull credit reports post-bankruptcy?https://wtools.io/code/raw/so?/2016/07/08/are-banks-unable-to-pull-credit-reports-post-bankruptcy/
Fri, 08 Jul 2016 07:03:23 +0000http://legalknowledgeportal.com/?p=6604A reporter recently contacted me to talk about a new FCRA class action which alleges that banks may not obtain credit reports on consumers, even after those consumers have discharged their debts to the banks in bankruptcy. The case is Bailey v. Federal National Mortgage Association, Case No. 1:16-cv-01155 (D.D.C). For this month’s blog entry, I’m going to post her questions and my answers:

Reporter:
It’s a FCRA case about a borrower filing a class-action suit against Fannie Mae for unauthorized credit inquiries post-bankruptcy. The borrower filed Chapter 7 and was discharged from his debt in 2013 but alleges 3 years after the discharge, Fannie made an unauthorized inquiry on to Equifax. [My note: the claim appears to be that Bailey obtained a mortgage from Bank of America that was transferred to Fannie Mae; that he filed for bankruptcy in April 2013; that he was discharged in July 2013; and that Fannie Mae pulled his report in July 2015. The claim would be that Fannie Mae lacked a permissible purpose to do this and thus violated the FCRA at 15 U.S.C. Sec. 1681b.].

Just talking to a couple of people to get their take on the issue. Do companies have a right to do so? Does the borrower have a strong case or no? Could this set off a trend for other borrowers to file a similar suit?

Me:
There are two big hurdles that this lawsuit will have to overcome, and I doubt that it will be able to do so.

First, the plaintiff will have to show that there are no circumstances under which a mortgage lender can check a credit report post-discharge. If there are some circumstances when that’s okay, and others where it isn’t, then you have to look at the details of each check, which would make a class action impossible. My impression is that after a consumer files for bankruptcy and gets his mortgage discharged, the lender still needs to service the mortgage for a period of time, and it may need to check the consumer’s credit as part of that process. Am I surprised that Fannie Mae checked this guy’s credit three years after his loan was discharged? Yes. But I think that some checks post-discharge may be permissible, and if that’s true, then a class action would not make sense.

Second, the plaintiff will have to show that Fannie Mae’s alleged FCRA violation caused him real harm. This is a big issue – the Supreme Court just stated in Robins v. Spokeo that sometimes an FCRA violation will not cause any harm, and when that happens, the plaintiff lacks standing, and any lawsuit should be dismissed. Here, the plaintiff seems to be alleging that when Fannie Mae checked his credit report, it: i) invaded his privacy; ii) lowered his credit score; and/or iii) made him scared about a possible data breach in the future. This is exactly the kind of intangible harm that the Spokeo decision talked about. It makes the lawsuit look like something that lawyers are doing to get money, as opposed to a call to stop truly problematic behavior.

Last words:
It’ll be interesting to see how this case proceeds. Law360 says that “Joshua B. Swigart of Hyde & Swigart and by Abbas Kazerounian of Kazerouni Law Group APC.” I have dealt with Hyde & Swigart before, and they are good plaintiffs’ lawyers.

]]>Look Before You Leap: The Ramifications of Electing S Corporation Status Too Earlyhttps://wtools.io/code/raw/so?/2016/04/25/look-before-you-leap-the-ramifications-of-electing-s-corporation-status-too-early/
Mon, 25 Apr 2016 09:48:35 +0000http://legalknowledgeportal.com/?p=6507For many small businesses operating an active trade or business, an election to form an LLC taxed as an S Corporation makes the most sense. It has several advantages, including limited liability, only one level of taxation, and minimal corporate formalities and other legal maintenance requirements. When compared to an LLC taxed as a partnership or disregarded entity, an S corporation can often save the owner(s) a significant amount of FICA taxes on an annual basis.

But an S corporation is also subject to significant limitations: it can have no more than 100 shareholders, most entities and certain trusts cannot be shareholders, corporate profits must generally be divided amongst the owners on a pro rata basis, and it can only have one class of stock. In addition, unlike the single member LLC taxed as a disregarded entity, the sole owner of an S Corporation must generally pay himself or herself a wage and is therefore subject to payroll reporting. Lastly, an S Corporation is typically not a good vehicle to own passive investments such as most rental real estate. A single member LLC treated as a disregarded entity can generally avoid a separate income tax return from its owner. As a result, an S Corporation may carry with it additional tax preparation expenses and other ongoing costs that a disregarded entity may not incur.

In our experience, the costs associated with maintaining an S election may be appropriate for a single-member LLC that meets the S corporation eligibility requirements above and generally produces (or is expected to produce) more than $60,000 (or so) of annual net taxable income from an active trade or business. While an S election may be the right fit, a business owner should first evaluate the limitations and costs applicable to an S Corporation, particularly those relating to investor limitations and tax preparation fees.

For the most part, once the election has become effective, it cannot be revoked until the next taxable year. Once the election is effective, you must file the tax return for an S Corporation and be subject to the other applicable S Corporation regulations. While there is some discretion for the IRS to accept a revocation of the election, this is not guaranteed and may preclude another election being made for the entity for up to five years.

Before making any entity choice, you should weigh all restrictions and expenses associated with your selection. Some choices, like an S election, may be unable to be immediately undone.

]]>Eighth Circuit Opinion Provides Guidance on Post-Discharge Agreementshttps://wtools.io/code/raw/so?/2016/04/05/eighth-circuit-opinion-provides-guidance-on-post-discharge-agreements/
Tue, 05 Apr 2016 09:33:10 +0000http://legalknowledgeportal.com/?p=6467In Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015) the Eighth Circuit addressed the validity of post-discharge “Change in Terms Agreements” between a bank and a borrower. Lapides, as president of a seafood import business, secured a line of credit from Venture Bank, and as collateral gave Venture Bank a third mortgage on the Lapides’ home. After Lapides filed for Chapter 7 bankruptcy, he met with Venture Bank and agreed that the Lapides would continue to pay on the third mortgage after the discharge so that Venture Bank would not foreclose on the mortgage.

After the bankruptcy discharge, Lapides and Venture Bank entered into two Change in Terms Agreements which reflected the terms agreed to at the pre-discharge meeting between Venture Bank and Lapides. Under the Change in Terms agreements Lapides would make payments to Venture Bank on the existing mortgage to establish his credit to induce Venture Bank to later allow Lapides to refinance the mortgage . Lapides made payments under the Change in Terms agreements for twelve months, and Venture Bank continued to remind him when payments were due. When Venture Bank continued to not refinance the mortgage, Lapides ceased making payments. Venture Bank then filed suit against Lapides for failure to make payments under the Change in Terms Agreement and sought to foreclose on the third mortgage. Lapides counterclaimed on grounds that Venture Bank’s efforts to collect payments after the bankruptcy discharge violated the discharge injunction imposed by 11 U.S.C. § 524(a)(2). Both parties filed cross motions for summary judgment.

The district court ruled in Lapides favor, dismissed Venture Bank’s claims, and awarded Lapides damages in the form of the return of all payments made under the Change in Terms Agreements and attorney fees. Venture Bank appealed. The Eighth circuit noted that in order to be enforceable the Change in Terms Agreement had to either meet the requirements of a reaffirmation agreement under 11 U.S.C. § 524(c) or must contain all of the essential elements of a contract under state law. The parties admitted that the Change in Terms agreement did not comply with 11 U.S.C. § 524(c). To be a valid contract, the Change in Terms Agreements needed to have consideration (value exchanged by each side) and mutual assent. The court noted that the payments by Lapides were not made in return for a definite promise to refinance, but rather were demanded by Venture Bank to continue the refinancing negotiations. Further, the court noted that a secured creditor’s post-discharge forbearance from foreclosing on a pre-discharge debt is not sufficient consideration to make an agreement to pay the pre-discharge debt a valid contract. Therefore the Eighth Circuit affirmed the district court’s ruling in Lapides favor. The lesson from this case is that a lender must provide new consideration if the lender wants to renew and enforce a pre-discharge obligation, and that an agreement to accept payments in return for considering refinancing does not constitute consideration.

]]>UK’s First Deferred Prosecution Agreement reached following a failure to prevent bribery under Section 7 Bribery Act 2010https://wtools.io/code/raw/so?/2015/12/08/uks-first-deferred-prosecution-agreement-reached-following-a-failure-to-prevent-bribery-under-section-7-bribery-act-2010/
Tue, 08 Dec 2015 07:16:54 +0000http://legalknowledgeportal.com/?p=6367The Head of the Serious Fraud Office, David Green QC, has announced that the Serious Fraud Office’s (SFO) first application for a Deferred Prosecution Agreement (DPA) was approved by Lord Justice Leveson at Southwark Crown Court on Monday, 30 November 2015.

Background
The concept of a “deferred prosecution” was introduced in the United States and, in a (radically) different form, has been adopted here, pursuant to Section 45 and Schedule 17 of the Crime and Courts Act 2013 (“the 2013 Act”).

A key feature of the deferred prosecution scheme under the 2013 Act is the requirement that the Court examines the details of any proposed agreement, to ensure that the statutory conditions are satisfied. The statutory scheme under the 2013 Act is a two stage process:

Stage 1: following commencement of negotiations to try and obtain a DPA, there must be a preliminary hearing, held in private, for the purposes of ascertaining whether the Court will declare that the proposed DPA is “likely” to be “in the interests of justice” and its terms are “fair, reasonable and proportionate” – the provisional approval stage. The Court must give reasons for its provisional approval and if a declaration is declined, a further application is permitted.

Stage 2: having got through Stage 1 and having received provisional approval, it is for the Prosecutor to apply to the Crown Court for a declaration, made in open Court, that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate.

Accordingly, and in contradistinction with DPAs obtainable in the United States, DPAs under the 2013 Act are subject to the scrutiny and discretion of the Crown Court; they are not “private” arrangements made between the Prosecuting Authority and the reporting party (usually the company guilty of bribery, corruption and/or other criminal conduct).

The First DPA Approved under the 2013 Act
Standard Bank Plc, now known as ICBC Standard Bank Plc (Standard Bank), has become the first counterparty to an approved DPA under the 2013 Act, having self-reported to the Serious & Organised Crime Agency and the SFO, evidence to show that it had failed to prevent bribery in breach of its obligations under Section 7 of the Bribery Act 2010 – the requirement that corporates must have adequate procedures to prevent bribery.

Facts – as summarised in the Approved Judgment and Indictment
Standard Bank were given a mandate to raise US$600m on behalf of the Government of Tanzania. Pursuant to this mandate, Standard Bank’s subsidiary in Tanzania, Stanbic, entered into an agreement with a Tanzanian company called Enterprise Growth Market Advisors Limited (EGMA). Two of the three directors of EGMA were the Commissioner of the Tanzanian Revenue Authority (therefore a Government Official) and the former CEO of the Tanzanian Capital Markets & Securities Authority. Standard Bank made no enquiries about EGMA; it relied on its subsidiary, Stanbic, to carry out all the due diligence processes (even though the business was being done in a high risk country).

EGMA were paid a fee of 1% of the funds raised; the fee being paid into an account that EGMA opened with Stanbic. Almost all of the money was withdrawn from the account in cash and it is this that caused alarm bells to ring at Standard Bank. They immediately instructed a law firm to investigate and the matter was reported to the Prosecuting Authorities within three weeks. Standard Bank found that EGMA provided no services and/or consideration for the fee of US$6m that it received.

The indictment faced by Standard Bank alleged that the fee paid to EGMA was intended to induce representatives of the Government of Tanzania to perform a “relevant function or activity “improperly”, namely, showing Standard Bank and its Tanzanian subsidiary, Stanbic, favour in the process of appointing or retaining them in order to raise funds for the Government.

Terms of the DPA
The Crown Court’s judgment approving the DPA was given on 30 November 2015. The terms of the DPA include:

an obligation of continued cooperation with Prosecuting Authorities in the UK and elsewhere in relation to the matter summarised above;

a disclosure obligation in relation to any relevant documents that subsequently come to light;

the payment of compensation in the sum of US$6m plus interest (assessed at US$1,046,200 odd);

an agreement not to seek any tax reduction in the UK or elsewhere (i.e. not to offset the compensation and interest against corporation tax);

disgorgement of profits in the sum of US$8,400,000;

a financial penalty in the sum of US$16,800,000;

payment of the SFO’s costs in the sum of £330,000;

an obligation to commission an independent report, to be completed within six months from 30 November 2015, the scope of which to be agreed by PWC LLP and the SFO on the Bank’s anti-bribery and corruption policies and their implementation. The report to include advice or recommendations on:

within 12 months of the date of the final independent report and to the satisfaction of the Independent Reviewer, implement the advice or recommendations contained in the independent report;

permit PWC LLP access to any such material they request in order to collect relevant information and fulfil their function;

require PWC LLP to cooperate generally with the SFO as requested by it and to provide the SFO with a copy of reports immediately on completion, notify the SFO where requested of Standard Bank’s progress in implementing the recommendations of the Independent Reviewer and confirm to the SFO Standard Bank’s compliance with paragraph 10 above;

the ultimate responsibility for identifying, assessing and addressing risks remains with the Board of Directors of Standard Bank; and

the deferred period is for 3 years so that, subject to the Bank’s compliance with the DPA, the indictment will be withdrawn.

Breach of the DPA
If during the term of the DPA, the SFO believes that Standard Bank has failed to comply with any of its terms, the SFO may make a breach application to the Court and if the Court terminates the DPA, the SFO may go on to make an application for the lifting of the suspension of the indictment associated with the DPA and thereby reinstitute criminal proceedings.

Lesson to be learned

The Head of the SFO, David Green QC, has stated publicly, on a number of occasions, that the SFO is motivated, funded and well-resourced to bring bribery and corruption charges.

A DPA in this case was likely to be possible only because there was no allegation against Standard Bank or any of its employees that it or they knowingly participated in an offence of bribery; the offence was limited to an allegation of inadequate systems to prevent “associated persons” from committing an offence of bribery.

The compensation, fine, disgorgement, costs (SFO’s and PWC LLP’s) made the mandate won by bribery, economically disastrous.

The Court, as is common in the United States, appointed PWC LLP to act as a monitor to ensure that Standard Bank and its advisors comply with the terms of the DPA. The Bank will have to bear, in addition to the compensation, fine, disgorgement, and costs, the costs of the Independent Review.

The DPA does not include any protection against prosecution of any present or former officer, employee or agent or against Standard Bank for conduct not disclosed prior to the agreement.

The Board of Directors of Standard Bank remain fully responsible for the Bank’s ongoing conduct, its obligations under the DPA and the Bank’s continued cooperation with the Prosecuting Authorities and the Independent Review.
It is also important to note that the SFO worked closely with the US Department of Justice and the Securities & Exchange Commission throughout the process. A penalty of US$4,200,000 has been agreed between Standard Bank and the SEC in respect of separate, but related conduct.

Finally, of course, the fact that the DPA is made public does tremendous harm to Standard Bank’s brand.

What to do?
To avoid this occurring in your business, you must ensure that your company has complied with its obligations under the Bribery Act, including conducting a proper risk assessment, thereafter implementing policies and procedures, training and monitoring in order to ensure that your company can benefit from the only defence available under the Bribery Act 2010, namely that your company has “adequate procedures” in order to prevent bribery. (Indeed, if a company has “adequate procedures” this is becoming recognised as a strong point of mitigation in relation to FCPA prosecutions too).